This section looks at how five pulp projects in Brazil, Swaziland, Thailand, Indonesia and Uruguay were built, where the financing came from and what the impacts were for local people.

Veracel, Brazil: A failed and destructive model of “development”

Veracel started up its massive new pulp in June 2005 near Eunápolis in the state of Bahia in Brazil. Two years later, almost 350 organisations and individuals signed on to a statement about the Veracel pulp mill and its plantations. The statement clearly explains what is wrong with this sort of project:

“We consider that a company such as Veracel Celulose, one of the symbols of the ‘development’ model imposed in an arbitrary, illegal and violent way, giving rise to serious negative consequences and causing violence, poverty and hunger to the people of the Extreme South of Bahia, cannot be environmentally responsible, socially beneficial or economically viable.

“For the traditional peoples and member organizations of the Socio-Environmental Forum of the Extreme South of Bahia and the Alert against the Green Desert Network, large-scale monoculture eucalyptus plantations are ecologically disastrous, socially unjust and economically perverse for the region.”[104]

The 900,000 tonnes a year pulp mill cost US$1.25 billion and was built with financing from the European Investment Bank (EIB), the Nordic Investment Bank and Brazil’s development bank (BNDES).[105]

The company is a joint venture between two giants of the pulp and paper industry: the world’s largest producer of paper, Stora Enso (Finland-Sweden), and the world’s largest producer of bleached eucalyptus pulp, Aracruz (Brazil). Pulp from the mill is to be exported, mainly to Europe, the USA and Asia.

Veracel planted its first eucalyptus tree in May 1992[106] and construction of the pulp mill started eleven years later.[107] Before the pulp mill was constructed, eucalyptus from Veracel’s plantations was shipped to Aracruz’s pulp mills in Espirito Santo.

The Veracel project is part of Stora Enso’s plans to move a large part of its production to the Global South. In May 2005, Kari Vainio, executive vice-president of communications at Stora Enso, told the Financial Times, “With time, production will shift from North America and Scandinavia to the southern hemisphere.”[108]

Veracel already has plans to expand. According to Pulp and Paper International magazine, much of the infrastructure necessary for the two new lines was installed when the pulp mill was built.[109] In 2004, Aracruz’s Chief Marketing and Sales Officer Joao Philippe Carsalade told investors that Veracel was looking to expand its operations. “There are plenty of land bases,” Carsalade said. “It’s a question of building up a forest [sic] base for that. Also, there are some other alternatives that we will start looking at, in terms of areas in which we can build forest [sic], and with a future plan of putting up a pulp mill.”[110]

In 2005, Stora Enso’s then-CEO Jukka Härmälä described the Veracel pulp mill as “the most cost competitive short fiber pulp mill in the world”.[111] But these cheap production costs are only possible because of a series of subsidies and cheap loans. In October 2001, EIB approved a US$30 million loan to Veracel. The loan covered establishing 26,000 hectares of eucalyptus plantations, buying forestry equipment and building and upgrading hundreds of kilometres of roads.[112]

Veracel invested about US$26 million in infrastructure, including roads and its own port. “There was nothing but trees when we arrived here,” Jorma Kangas, Veracel’s project manager, told the Financial Times in 2005.[113]

In December 2003, EIB approved another loan to Veracel, this time a US$80 million loan for construction of the pulp mill.[114] The Nordic Investment Bank provided a loan of US$70 million.[115] The Brazilian Development Bank (BNDES) also financed the pulp mill project to the tune of US$500 million.[116]

The European Investment Bank’s process for approving its loans was not transparent. In October 2003, representatives from four Brazilian NGOs and three European NGOs met with EIB officials in Brussels to urge the bank not to finance the Veracel project. During the meeting, the EIB stated that it wanted “hard facts” from NGOs. Yet the Bank offered no reports, documents and no concrete information about the project. Marcelo Calazans from the Brazilian NGO FASE Espirito Santo asked to see the documents that EIB has produced in its evaluation of the Veracel project. Werner Schmidt, a Senior Economist at the EIB, replied,

“We look at the social and market aspects of the project. We look at employment. What was the situation before the project and with the project? Our evaluation is a continuous process. We look at market aspects, whether the project is financially and economically viable. This is all part of the due diligence process.”[117]

However, while the Bank confirmed that it had produced reports during its evaluation process, none of these documents are available to the public. The Bank even declined to release the date when the Bank’s Board would meet to discuss the Veracel project.

EIB later described this meeting as “the occasion for a useful exchange of information and open and candid discussions”.[118] The Bank’s web-site described the meeting as “a dialogue” with NGOs and stated that EIB had “conducted extensive correspondence on the project with interested NGOs”. After Urgewald and CEE Bankwatch sent a letter (signed by 169 NGOs) to EIB President, Philippe Maystadt, complaining about this misrepresentation of the facts, EIB withdrew these claims from its web-site.

At the end of the meeting Marcelo Calazans asked the Bank officials how they felt about supporting the overconsumption of paper in the North. Philippe Guinet, who works on technical assessments of EIB projects, replied, “You’re asking personally. I can’t answer. My feelings cannot influence my work at the Bank. . . . This is a question of global trade and economics.”

Exactly.

The Veracel project led to a series of lucrative contracts for European and Nordic companies. Pöyry produced a range of feasibility studies[119] and an environmental impact assessment.[120] Pöyry’s Brazilian subsidiary Jaakko Pöyry Tecnologia Ltda subsequently won US$16 million in engineering contracts on the construction of the Veracel pulp mill.[121]

Andritz (Austria) won a US$230 million contract to plan and build the fibreline and a white liquor plant.[122] Eka Chemicals (Sweden) won a US$58 million contract to supply chemicals.[123] Degussa (Germany) expanded its hydrogen peroxide plant at Barra do Riacho in Espírito Santo to supply the Veracel pulp mill.[124] Invensys Systems Brazil, (part of the UK-based Invensys Group) won the contract to supply automation systems.[125] Aker Kvaerner (Norway) won a US$110 million contract to build Veracel’s boilers.[126] Metso Automation (a subsidiary of Finnish company Metso Corporation) won a US$7 million order to supply valves and online analysers[127] and Metso Paper won a US$28 million contract to supply a complete timber yard system.[128] Partek Forest (Finland) won a US$25 million contract, its largest ever, to deliver harvesting equipment to Aracruz and Veracel.[129] Norsul (part of Norway’s Lorentzen Group which owns 28 per cent of shares in Aracruz) built three specially designed ocean-going ships and seven barges to transport pulp bales from Veracel to Aracruz’s port Portocel in Espírito Santo.[130]

Veracel controls more than 164,600 hectares of land. Of this total about 78,000 hectares is industrial tree plantations.[131] In addition, Veracel has contracts with farmers to grow eucalyptus on an area covering a total of 10,000 hectares.[132] Just under half of Veracel’s land is set aside for what the company describes as “environmental recovery and preservation”.[133]

Veracel’s vast area of plantations exacerbates the problems of land concentration and landlessness in the south of Bahia state, where large numbers of rural people have no land, or too little land to earn a livelihood. Veracel bought much of its land from large landowners, many of them cattle ranchers, but more than 800 people had to leave their homes to make way for Veracel’s operations.[134]

José Koopmans, a priest and human rights activist in the South of Bahia, has documented the impact of eucalyptus on local livelihoods for many years. Koopmans states that at least one-eighth of the land that Veracel bought was used for small-scale agriculture. According to Brazilian law, land that the government has distributed through its land reform process cannot be resold. While Veracel denies allegations of any wrong-doing in its land purchases, Koopmans explains that Veracel used people to buy up land on their behalf: “I even got to know a person in 1995 who was used as a front by Veracruz in order to buy land for the company that subsequently was transferred to the corporation,” he told researchers from the Swedish NGO Swedwatch.[135]

Veracel and its backers at the EIB claim that the project is environmentally friendly. “The project will have a significant positive impact on the environment,” according to the EIB. “It will help to reverse tropical rain forest destruction, to reduce the pressure for logging on natural forests and to maintain biodiversity.”[136] EIB appears to have forgotten Veracel’s record.

In February 1993, one year after Veracel started its plantation operations under the name Veracruz Florestal, the Brazilian authorities temporarily suspended operations after local NGOs and the Union of Forestry Workers documented how the company was clearing the Atlantic Forest (Mata Atlântica) to make way for its tree plantations.[137]

Veracel acknowledges that it cleared 64 hectares of forest in 1993. “That was the only time in Veracel’s history when it acted against good environmental practice,” according to Veracel’s Vitor da Costa.[138]

In fact, Veracel does not know how much forest it cleared to make way for its plantations. At an NGO meeting in Sweden in October 2003, I asked João Fernando Borges, Veracel’s Corporate Planning Manager, exactly how much forest Veracel cleared to make way for its plantations and other operations. Borges did not answer the question, instead explaining that there were areas of forest, bush and shrub in the area before Veracel started its operations. Ricardo Carrere, World Rainforest Movement’s international coordinator, repeated the question. Borges did not answer the question. I tried again. Carrere tried again. Borges still did not answer the question. This went on for some time, much to the amusement of the others at the meeting. Eventually Borges promised to investigate and to send us the details of the area of forest, bush and shrub that was cleared. WRM is still waiting for Borges’ answer.

There are several documented cases since 1993 where Veracel has cleared forest. In 2003, two researchers with SwedWatch, a Swedish NGO, photographed an area where Veracel had cleared forest to make way for a timber standing area.[139] In December 2003, officials from the federal environmental bureau, IBAMA, pointed out that a large area of forest had been logged to make way for eucalyptus plantations for Veracel. Two years later, IBAMA fined Veracel US$136,000 for preventing “regeneration of the Atlantic Rainforest on 1,200 hectares”. The company denies the allegations.[140]

Veracel often refers to its Veracruz Station, a 6,000 hectare forest conservation area, to show how environmentally friendly its operations are. The forest area was part of the land that Veracel bought for its plantation operations in the south of Bahia state. In fact, Veracel would be in breach of Brazilian law if it did anything other than protect this area of forest.[141]

Veracel also makes a big deal of its programme to restore areas of the Mata Atlântica. Its plantations cover less than half of the area the company owns. However, much of the area not planted with eucalyptus is in valleys, gullies and on slopes – land which in any case would be difficult to harvest mechanically.[142]

“Within Veracel’s area it is very hard to find pieces of good forest, but it is those good parts that Veracel show on their homepage and in their publications,” says Pedro Rocha, who works in the biology department at the Federal University of Bahia in Salvador, conducting research into the relationship between eucalyptus plantations and natural forest.[143]

In June 2008, the federal court in the city of Eunápolis passed a sentence ordering Veracel to plant with native trees 96,000 hectares of land covered in licences granted between 1993 and 1996 for planting with eucalyptus. Veracel was also fined US$12.5 million for deforesting areas of Atlantic forest. Once again, the company denies the charge and plans to appeal.[144]

Veracel claims that its guidelines which are supposed to prevent planting close to water sources or streams prevent any impact on local water sources. Yet farmers interviewed in 2003 by SwedWatch said that the water level in creeks, ponds and lakes was significantly lower than before Veracel started planting. In some cases, watercourses have completely disappeared. Fishing and irrigation of agricultural farmland became impossible.[145]

In November 2005, I visited the Veracel area with colleagues from the Brazilian NGO network Alert Against the Green Desert Movement. A local government official in Eunápolis told us how several thousand people had moved into the area to work on the construction of the pulp mill. When the construction work was finished, about five thousand people were left unemployed. Many of them stayed in the area. The local authorities have to provide services for them, but Veracel contributes little in taxes. Under a 1996 Brazilian law, exports are exempt from state sales tax. Veracel exports almost all its pulp. The government official suggested that a law insisting that pulp companies sell at least 30 per cent of their produce in Brazil would at least mean that the local authorities saw some benefits from pulp mills.

We visited the community of Maneco, not far from Eunápolis and spoke to villagers about how things had changed since Veracel started planting its eucalyptus. “People have moved away since the eucalyptus arrived,” one man told us. “In one commune everyone has moved away.”

This used to be a very rich area, villagers told us. One of the villagers we spoke to used to plant papaya and passion fruit and had employed many people on a small area of land. But since Veracel arrived, “There are no jobs here now and no money from the eucalyptus,” a villager said. The village shop owner told us that business was down by about 80 per cent. The river near the village is drying up, and is increasingly polluted by agrochemicals from the plantations. Plantation workers clean their tractors in the river which further pollutes the water. Fish and even cattle have died as a result.

“Animals and birds have disappeared from the area, but now there are many snakes in the village,” a villager told us.

The villagers from Maneco took us to see their cemetery. It is now completely surrounded by eucalyptus plantations. We had to drive between the rows of trees to get there. Villagers told us of people getting lost in the plantations on their way to a funeral. Veracel has even planted trees on part of the cemetery.

In April 2004, about 2,000 families[146] from the Brazil’s Landless Peasant Movement (MST – Movimento dos Trabalhadores Rurais Sem Terra) occupied 25 hectares of land and cut down four hectares[147] of Veracel’s eucalyptus trees.[148] “Nobody eats eucalyptus,” they shouted as they occupied the land[149] and started planting corn, manioc and beans.[150]

Veracel wrote immediately to Brazil’s President, Lula da Silva, demanding “a more energetic action” from the President.[151] “It’s a very bad sign for investors. The government can’t lose control like this,” Vitor da Costa, then Veracel’s president, told the Financial Times.[152]

After five days, the MST decided to avoid what would probably have been a violent confrontation with the state police and accepted an offer from the federal governmental agency for land reform in an area covering 30,000 hectares.

Six months later another protest against Veracel took place. This time, 300 indigenous Pataxó blocked the BR-101 highway for 19 hours to protest against the fact that Veracel had planted eucalyptus on their traditional lands.[153]

In 2004, the Brazilian NGO FASE Espirito Santo explained the contradiction between the enormous amounts of money invested in the pulp mill compared to the amount spent on addressing the problem of landlessness in Brazil – a problem much more immediate to millions of Brazilians than producing pulp for the international paper industry:

“The occupation of the Landless Peasant Movement, the MST, shows the huge contradiction between two policies that are priority for the Federal Government but, in practice, cause very different results: on the one hand, billions of dollars of investments is at the disposition of the export-oriented plantation industry that will create few concrete jobs and perspectives for the majority of the local people. The Veracel pulp mill, in construction right now, an investment of US$1.25 billion, will create around 500 direct jobs in the pulp mill; on the other hand, the MST had to pressure the government with tens of occupations over the past few weeks, so that a total amount of about US$1 billion will be finally spent this year by the government, less than the total investment of Veracel, but enough to settle directly around 60 thousand families, according to the federal government, by the end of 2003. But, while the Veracel pulp mill is in fact being constructed, the land reform, even with the intended budget, deals with all types of problems that are causing the present dissatisfaction among the MST and the social movements in Brazil in general, resulting in a paralysed land reform.”[154]

In March 2008, Veracel’s plantations were certified as well managed under the Forest Stewardship Council system. SGS Qualifor, FSC’s certification body, awarded the certificate despite the impacts on land rights, despite the impacts on local livelihoods, despite the fact that Veracel has established parts of its plantations on land converted from forest – all of which is in breach of FSC’s standards. WRM declared the Veracel certificate as the “death of FSC”.[155]

The June 2008 Eunápolis court ruling ordering Veracel to pull up its eucalyptus plantations must surely lead to the withdrawal of the FSC certificate. It should also lead to investigations within the banks that lent to Veracel (in particular the European Investment Bank) to find out how their due diligence process failed to alert the banks to the fact that Veracel was illegally destroying areas of the Atlantic Forest.

Sappi, Swaziland: 50 years of industrial forestry fails to bring benefits for local people

Sappi, a South African pulp and paper company, rents almost 70,000 hectares of land from the Swaziland state, of which 54,212 hectares are planted with exotic pine trees. Sappi’s plantations in Swaziland are the epitome of what is wrong with industrial tree plantations. Species-rich grasslands were destroyed and people moved to make way for the plantations.

Every year, Sappi clearcuts a total area of 3,000 hectares of plantations, leaving vast scars on the landscape. When the clearcuts are replanted, the trees suck up water, drying up streams and reducing flow in rivers. Sappi’s plantations and nurseries can only be managed through the use of chemical pesticides.

What are today Sappi’s industrial tree plantations arrived in Swaziland as the result of an “aid” project funded by the UK’s Colonial Development Corporation. In 1948, Sir Evelyn Baring, then-High Commissioner for Swaziland, commissioned Dr Ian J. Craib to produce a study to look at the possibility of converting 55,000 hectares of grassland in the Great Usutu valley to tree plantations. Craib was a forester and managing director of Peak Timbers, another plantations operation in Swaziland.[156] Not surprisingly, given his background, Craib favoured expanding the area of industrial tree plantations.

CDC funded the land purchase and planting started in 1950. By 1958, Swaziland had the largest continuous area of plantations in Africa. In 1959, Courtaulds, a UK company, formed a joint venture with CDC to build a pulp mill. The mill opened in 1962, with a capacity of 90,000 tons a year.[157] The mill now produces about 200,000 tonnes of unbleached kraft pulp a year.

Set up as the Colonial Development Corporation in 1948, CDC’s initial brief was “to develop resources of Britain’s colonies”. In 1963, it changed its name to the Commonwealth Development Corporation. Now called the CDC Group, it invests UK tax-payers’ money in the Global South through a series of finance houses.[158] A bizarre privatisation process allowed the directors of CDC to earn huge amounts of money, by selling CDC’s fund management arm to themselves for a pittance, renaming it Actis and running it as a private equity company.[159] CDC’s only shareholder is the Department for International Development, the UK’s bilateral aid agency.[160]

In the late 1980s, despite having been involved in a series of disastrous aid projects, Peter Eccles, CDC’s general manager, described CDC as the “jewel in the British aid crown”. CDC held up its involvement in Swaziland as a success story. In Swaziland, as well as the Usutu pulp mill and its associated pine plantations, CDC has supported sugar plantations.

Swaziland’s main industries are sugar and forestry. Both require large areas of land. “They are a disaster for a country like Swaziland, where there are still feudal social relations,” said Nhlanhla Msweli of the Swaziland Campaign Against Poverty and Economic Inequality (SCAPEI) at a meeting in South Africa in 2003.[161] In a country where the majority of people are landless, industrial tree plantations cover almost 10 per cent of the land.[162]

Since 1988, Sappi has owned a majority share in the Usutu Pulp Company. In 1982, negotiations to sell Usutu to the South African pulp and paper company Mondi fell through. Six years later Sappi bought 50 per cent of the Usutu pulp company from Courtaulds and a further 30 per cent from CDC. The remaining 20 per cent is held by the Swaziland government.

In September 2001, Sappi threatened to close the Usutu pulp mill, unless it could find a way of reducing costs by US$8.3 million within three months. In 2002, Sappi battled with the Swaziland Agricultural and Plantation Workers’ Union about laying off 650 people from the pulp mill. Sappi’s then-executive chairman Eugene van As told investors that Sappi came “fairly close” to closing down the pulp mill. “The mill is highly competitive, but not with 650 people more than it needs,” van As said.[163]

The town of Bhunya was built to house workers at the pulp mill. It is a one company town. As a resident put it, “If SAPPI closes, this place is a ghost town tomorrow.”[164]

When Sappi took over the firm, it employed 2,700 people. Today, Sappi Usutu has outsourced most of its work. It now employs only 43 people directly. The company employs a further 1,400 people on a contract basis.[165]

A 2004 report by Wally Menne of the South African Timberwatch Coalition, based on interviews with community members, environmentalists as well as government and industry representatives, documents how industrial tree plantations have damaged ecosystems and caused loss of biodiversity. Menne explains that plantations have been planted on the land with the most productive potential, at the expense of other agricultural land uses. “The potential benefits of having allowed the area to remain as it was originally could exceed those derived from the current use,” Menne notes. “Other agricultural land uses that might otherwise have become established there could possibly have produced greater benefits for the people and the natural environment of Swaziland.”[166]

In July 2006, Sappi’s plantations in Swaziland were given the Forest Stewardship Council’s “green” label after an assessment by the Soil Association’s Woodmark. In the UK, the Soil Association is well known as a promoter of organic agriculture. It is difficult to imagine a form of land management which is further removed from the Soil Association’s aim of promoting organic agriculture than Sappi’s industrial tree plantations.

More greenwashing of Sappi’s plantations comes from Professor Julian Evans, a British forester, often considered to be one of the world’s leading plantation experts. Evans has made his career based in part on his studies of the pine plantations established to feed the Usutu pulp mill. Professor Evans is apparently oblivious to the social and environmental impacts of industrial tree plantations. For example, at the 2004 meeting of the International Union of Forest Research Organizations, Evans said that

“Productive plantations, whether for industry or energy, need not be ecological deserts devoid of wildlife or an unwanted landscape, but efficient wood-growing crops managed so as to enrich diversity, development and their desirability as a land use. With plantation forests [sic] ‘you can have your cake and eat it’, generating win-win situations. This, I believe, is the future direction for the great bulk of planted forest [sic].”[167]

Evans started monitoring the long-term productivity of the Usutu plantations in 1968. In a 1988 article in FAO’s Unasylva magazine, he reported on the results of twenty years of studies, and assessed “the various environmental consequences of converting some 52000 ha of high veld grasslands into what is essentially a pine monoculture.”[168] His description of the plantations as monocultures is accurate. Unfortunately, little else that Evans has written about Swaziland shows similar insightfulness.[169]

“Virtually no Swazi villagers were displaced,” according to Evans. Yet, according to Woodmark’s public summary of their assessment for FSC,

“The majority of Usutu’s land-holdings were previously private title deed portions, belonging to sheep and cattle farmers requiring grazing for only part of the year, or non-resident land-owners who rarely visited the land. The afforestation drive of the 1950s was preceded by negotiations with local chiefs, after which assistance was given with relocation to beyond the Company’s property.”[170]

A total of 48,000 hectares was bought of which 42,000 hectares was planted, “the remainder being unplantable ground, fire-breaks, roads and land for villages”, notes Evans. By 1988, the company held 67,000 hectares of which 55,000 hectares were planted with pine monocultures.

Evans argues that replacing grassland with pine plantations created “a large area of ‘new’ habitat, structurally much more diverse than grass veld”. He adds that by excluding humans from the ecosystem, “the large area of forest [sic] is now excellent wildlife cover”. While he admits that no systematic monitoring of wildlife has been carried out, Evans reports that since 1968, the numbers and varieties of animals have increased, “and today greatly exceed those of the pre-existing grassland”. Evans explains that this is “because the large plantations provide shelter and refuge from man.” He continues,

“In the Usutu forest [sic], hunting is forbidden, man [sic] finds the monoculture relatively unattractive for recreation, and the distance of sight, hearing, and smell are all reduced; thus animals are safer and more protected.”[171]

In its 2006 assessment of the Usutu plantations for FSC certification Woodmark came to a different conclusion. In the plantations, “there is very little wildlife,” wrote Woodmark’s assessors. Any wildlife in the plantations is “Due to the close proximity of Usutu to the Mlilwane Game Sanctuary” and “a number of interesting animal sitings [sic] have been noted by foresters and visitors to Usutu.”[172]

In order to produce his optimistic analysis of Sappi’s plantations, Evans introduces the concept of “narrow-sense sustainability”. This refers only to wood yields over several rotations, to determine whether trees “can be grown indefinitely for rotation after rotation on the same site without serious risk to their well being.”[173] Evans thus excludes the social and environmental impacts of tree plantations from his analysis and is looking only at the technical aspects of industrial tree plantations. Nevertheless, he makes public statements that plantations in Swaziland are “sustainable”, without making any mention of “narrow-sense sustainability”.[174] He has also done so in writing:

“There is no general evidence of declining yields resulting from intensive plantation forestry of cultivation of three crops of the same species on the same site. The prospects for this continuing are good. With good husbandry Usutu’s plantation forestry is demonstrably and wholly sustainable.”[175]

Evans fails to mention that what he’s talking about here is “narrow-sense sustainability”. It is nonsense to conclude from measurements of tree growth that Swaziland’s industrial tree plantations are “wholly sustainable”.

Although Woodmark recommended that Sappi should be certified by FSC, in its assessment Woodmark documented several serious problems with Sappi’s plantations. Perhaps the most important was the impact of the plantations on water supply. Woodmark found that Sappi’s replanting procedures did not comply with national regulations requiring a 30-metre-wide strip along streams. In one place trees had been planted too close to a stream. In another, a stream was channelled across a road instead of under it.[176]

In his 2004 report, Wally Menne of Timberwatch found that the plantations are affecting the flow of water. Menne interviewed Rex Brown of Environmental Consultancy Services, a Swaziland consulting firm which works for the government and private companies. Brown told him that he considers plantations to be one of the causes of water shortages in the country. “The plantations occur in important upland catchments – essential areas for the provision of water for equally important irrigation activities in the Swaziland Lowveld,” Brown said.[177]

During their assessment, Woodmark spoke to a local farmer, Peter George, whose land is next to one of Sappi’s plantations. “Due to the planting of pine trees since 1989 . . . the natural flow of water in the streams was severely depleted,” Peter George told Woodmark.

Woodmark chose to ignore what Peter George told them during the assessment, because he has taken out a legal case against Sappi. “The issue regarding the reduction of water flow caused by the planting of trees and the subsequent claim is ‘sub judice’ and is therefore under judicial consideration,” Woodmark’s assessors wrote in the Public Summary. Under the sub judice (from the Latin, “under judgement”) rule in British law it can be an offence to publicly discuss current or upcoming court cases. The rule is intended to protect the right of defendants to a fair trail, but in this case Woodmark is hiding behind the sub judice rule to prevent legitimate debate. When Woodmark’s assessors revisited Swaziland in 2007 for their annual audit of Sappi’s plantations, they did not invite Peter George to their stakeholder meeting. Neither did they visit his farm.[178]

Peter George bought the Elangeni Farm in the mid-1970s and started to farm the land. He grew vegetables and some acacia and eucalyptus trees. When he started farming, there was plenty of water. In the mid-1980s, the Usutu Pulp Company started planting the hills next to his farm with pine plantations. George was forced to stop farming when the streams on his farm dried up.

I visited Peter George’s farm in November 2007 with colleagues from the World Rainforest Movement. George showed us where the Usutu Pulp Company had planted trees right through the streams which had provided his farm with water. Several years ago, Sappi cleared the plantations and the streams started to recover, although it was 18 months before one of the streams started to flow again. Sappi has not replanted right up to the streams, but neither has it kept the 30-metre-wide strips along the streams which are required under Swaziland’s regulations.[179]

In addition to the impact of the plantations on water supply, Woodmark’s inspectors found several breaches of FSC standards. Woodmark’s inspectors visited a logging area, where more than 40 hectares was being clearcut. They found that there was no first aid provision, no designated area for equipment and provisions, no drinking water provided for workers and no fire fighting equipment. There were no records of training for workers and no training schedules for 2006. For a work force of 120, the contractor had only two first aiders. And both of their certificates had expired.

Oil was leaking from a storage area owned by one of the contractors. The oil separator pit was not built in accordance with Sappi’s specification requirements. A chemical store operator was not trained in health and safety issues handling toxic chemicals. Not all contractors had written safe work procedures including risks and hazards associated with the various tasks. Woodmark found that Sappi was using a fungicide which is prohibited in FSC-certified operations.

In spite of these breaches of FSC’s standards, Woodmark issued the FSC certificate along with a series of corrective action requests which Sappi was supposed to meet before Woodmark’s next visit to Swaziland in July 2007. After this visit, Woodmark issued a new series of corrective action requests.

In May 2007, I wrote to Kevin Jones, a manager at Woodmark and pointed out some of the problems associated with SAPPI’s plantations. I sent him an article I’d written describing some of the problems.[180] Jones replied, but he declined to let me make his response public. When I asked him for an on-the-record response to my article, he replied, “I will be away for the next week and a half. I will try to respond after I get back.” That was in June 2007. I’m still waiting for his on-the-record response.

More than fifty years of British-backed industrial forestry has not benefited the people of Swaziland. Unemployment in Swaziland stands at 40 per cent. More than two-thirds of the people in Swaziland live on an income of less than US$1 a day. About one third of the people in Swaziland rely on food aid to survive. Nearly 40 per cent of the population is infected with HIV – one of the highest rates in the world. Life expectancy has fallen to 30 years for men and 35 for women.[181] While not all Swaziland’s woes can be blamed on tree plantations, neither can it be claimed that covering tens of thousands of hectares with monoculture tree plantations is “development”.

Advance Agro is Thailand’s biggest pulp and paper company. The company has two pulp mills with a total production capacity of 580,000 tons a year and three paper plants with a total capacity of 600,000 tons a year.

Advance Agro was founded in 1989 by the Dumnernchanavit family. The company is part of the agribusiness Soon Hua Seng (SHS) Group, which was founded in the 1950s by members of the Dumnernchanavit family. Soon Hua Seng started growing eucalyptus on a commercial scale in the late 1980s. Advance Agro was listed on the Stock Exchange of Thailand in 1995. In 2006, Advance Agro’s profit amounted to 1.97 billion Baht.[182]

In addition to pulp and paper, Advance Agro also generates a total of 108 MW of electricity, using wood waste and black liquor as fuel.[183] The company does not generate all its own energy and buys some electricity from a coal-fired power station.[184]

The company exports 60 per cent of its paper to Hong Kong, China, Australia, and Europe.[185] In 2003, Advance Agro used 50 per cent of its pulp to produce paper. Five per cent was sold in Thailand and the remainder exported to Australia, China, Korea, and Malaysia among others.[186]

The company claims not to have any impact on native forests in Thailand, conveniently forgetting that in 1990 company employees were caught red-handed clearing forest to make way for eucalyptus plantations.[187] Advance Agro’s plantations have been one factor leading to the deforestation of large areas of eastern Thailand. Other factors include road building (partly built during the war in Indochina to link bases for US troops with the port at Chon Buri and also to access Cambodia’s forests), and promotion of large-scale industrial agriculture by the government with support from the World Bank. One of the beneficiaries of these policies was Soon Hua Seng, Advance Agro’s parent company.[188]

When Advance Agro’s subsidiary Agro Lines started establishing its eucalyptus plantations, villagers found they could no longer grow rice in neighbouring fields. The company bought villagers’ farmland in Prachinburi to convert the land to plantations. Allegations of intimidation of villagers surrounded the company’s plantations in eastern Thailand throughout the 1990s.[189] Canadian academic Keith Barney notes that “Thai NGOs have organized in opposition to the land displacement resulting from eucalyptus farming in eastern Thailand associated with the mill”.[190]

Villagers living near Advance Agro’s pulp mill complain of ash from factory chimneys being deposited in their gardens. Some villagers have developed itchy skin and the pulp mill often smells. In August 2000, black, stinking water from piles of wood and charcoal in Advance Agro’s factory compound leaked into a neighbouring canal killing a large number of fish. The cause was a collapsed dyke inside the factory compound.[191] The company routinely pours its waste water from pulp mill between the rows of eucalyptus trees. The water is filthy and green and lies in channels in the stony infertile soil.[192]

In 2007, the company announced that it would be delisting from the Stock Exchange of Thailand and that Yothin Dumnernchanavit would buy up all the shares in the company.[193] Having bought the company, Yothin intends to restructure it, at which point he may list the company once again on the SET or any other stock exchange.[194] Before the delisting, the four biggest shareholders in Advance Agro were all banks: UBS AG Singapore (21%), Citibank Nominees Singapore (10%), BNP Paribas Hong Kong (7%) and Deutsche Bank Singapore (6%).[195]

The announcement of the delisting led to a drop in Advance Agro’s credit rating. Standard & Poor’s lowered the company’s long term credit rating, saying that AA’s liquidity position is weak and its 2007 financial performance has been below expectations.[196]

The drop in credit rating could perhaps have something to do with Yothin’s record. Yothin is the eldest son of Kitti Dumnernchanavit and majority shareholder in Soon Hua Seng and Advance Agro. In August 2003, Yothin was forced to resign as managing director of Advance Agro after he failed to settle a 99 million baht debt guarantee with Bangkok Bank.[197] The Central Bankruptcy Court ordered the confiscation and liquidation of Yothin’s assets after he failed to settle the debt guarantee with Bangkok Bank.[198]

Several European and international banks have been involved in financing Advance Agro’s activities. When the company launched its initial public offering in 1994, the international lead manager was Barclays de Zoete Wedd. The project’s main backers were three Thai banks: Bangkok Bank, Thai Farmers’ Bank and Krung Thai Bank. Further financial support came from the UK’s Commonwealth Development Corporation (see Sappi Swaziland, above).[199] In 1994, the World Bank’s International Finance Corporation lent Advance Agro US$10 million.[200] A series of export credits guaranteed by Thai banks helped finance the machinery supply for the new pulp mill.[201]

Advance Agro was hard hit by the 1997 economic crisis, when the value of the Thai Baht collapsed. Advance Agro was left with debts of 22.6 billion baht, only 7 billion of which was baht-denominated debt.[202] Advance Agro subsequently breached the financial covenants on its loans.

In November 1997, the company became the first Thai company to issue high-yield bonds with a US$111.35 million bond offering on US markets.[203] The company raised more money by selling 19.9 per cent of its shares to Enso (which merged with Stora in 1998 to become Stora Enso) and 5.5 per cent to Japan’s Oji Paper.

In 2000, Advance Agro entered into a debt restructuring agreement with the Thai Banks. Advance Agro defaulted on export credit debt repayments leading to Bangkok Bank, Krung Thai Bank and the Thai Farmers Bank paying out more than US$100 million in guarantees.[204]

In June 2001, Advance Agro failed to pay US$28 million of its convertible bonds when they matured.[205] The company repaid the debentures within six months, however.[206]

The company’s problems deepened in August 2002, when DBS Thai Danu filed bankruptcy suits against Kitti and Trirat Dumnernchanavit. Kitti had borrowed 20 million baht from the bank in May 1998.[207]

In March 2003, Advance Agro was in default on repayments of 2.5 billion baht of debt from Thai banks.[208] Later in 2003, Advance Agro entered into another debt restructuring agreement, the “Master Override Agreement” with the Thai banks. Under this agreement, the maturity of Advance Agro’s 16 billion baht debt (including the export credit guarantee facilities made available by the Thai banks) was extended by nine years to 2012. Advance Agro also received a one year grace period on an instalment due in 2007 when the company had to retire US$48.72 million of high-yield notes.[209]

At the end of 2005, ABN AMRO and Deutsche Bank led a US$250 million share offering by Advance Agro. Some analysts thought that the shares might be difficult to sell, because Advance Agro was technically in default on its US bonds[210] and the company was (at the end of 2005) in negotiations to re-finance 14 billion baht debt.[211]

However, in the bizarre world of corporate finance, the fact that Advance Agro couldn’t repay its debts meant that it was more likely to have a successful share offering. Mark Leahy, head of syndicate for Asia at Deutsche Bank in Singapore, explains that

“Partly because Advance Agro went through a restructuring of its domestic debt – although with no haircut – and was in a technical default situation with its SEC-registered 2007 notes, they have become familiar to a number of investors, including distressed debt investors.

“This familiarity certainly helped create demand for this deal which provided a solid base of well educated demand upon which to build.”[212]

Euroweek magazine later described the deal as “highly successful”.[213]

In 2001, the South China Morning Post published an article asking critical questions about the way Advance Agro had spent the money it had raised up to that point. For example, Advance Agro’s second pulp mill, which cost at least US$800 million, features a “Space Dome”, which is used for corporate presentations. Advance Agro describes it as “beautiful both inside and outside”.[215] The South China Morning Post describes it as a “carbuncle on the side, about 15 metres off the ground”. The Space Dome was the idea of the wife of one of Advance Agro’s executives. She happens to be an interior designer. No one from the company could tell the South China Morning Post’s journalist how much the Space Dome had actually cost the company.[216]

The Space Dome may be the tip of a very large iceberg. The South China Morning Post quoted analysts of the company who described Advance Agro’s operations as “opaque”. In 2001, Advance Agro’s management was facing a bankruptcy suit over a debt of more than 100 million baht. Three members of the Dumnernchanavit family (Yothin, Anurat and Siriwan) were included in the suit, which was filed by Thai institution National Finance.[217]

In November 2002, the Securities and Exchange Commission of Thailand fined Trairat Dumnernchanavit 1.2 million baht for manipulating the price of Advance Agro stock between April and August 1998. Trairat used companies in his group to buy and sell shares in Advance Agro creating the impression that trade volume had increased significantly. Trairat was put on the Stock Exchange Commission’s black list and was not allowed to act as manager, director or major shareholder of any listed company “for at least five years”.[218] Today, Trairat is once again on the board of directors of Advance Agro.

In 2006, Stora Enso sold its shares in Advance Agro to private investors based in Hong Kong for US$80 million.[219] The relationship between Advance Agro and Stora Enso had been a stormy one. Stora Enso had first offered to sell its shares in October 2001. A Thai newspaper, The Nation, reported that Stora Enso was “unable to work with the management of Advance Agro”.[220]

In 2004, Stora Enso questioned Advance Agro’s 2003 financial results, particularly the transactions between Advance Agro and affiliated companies. Shortly afterwards, Advance Agro dismissed one of Stora Enso’s representatives from the company’s board. The Nation quotes sources as saying that Stora Enso had questions about Advance Agro and its business transactions, “particularly those with entities controlled by the Dumnernchanavit family”. Agro Lines is owned by the Dumnernchanavit family and supplies fibre to Advance Agro. National Power Supply supplied electricity. Logistics system is supported by Hi-Speed Trans Co Ltd – all these companies are affiliated with Advance Agro.[221]

Three years earlier, the South China Morning Post reported analysts as saying that “Advance Agro was forced to buy some of its wood and other raw materials from the Soon Hua Seng Group at a premium to the market price of up to 15 per cent.” The South China Morning Post notes that “The company failed to respond to questions about these claims.”[222]

Stora Enso may also have had concerns about the social and environmental impacts of Advance Agro’s plantations. In 2001, Stora Enso carried out a survey of the social and environmental impacts of all their plantation operations in the global South, including Advance Agro.[223] But despite several requests for a copy of the report, Stora Enso has declined to make the report public.

In April 2007, Advance Agro announced plans to build a new 420,000 tonnes a year paper mill at its existing site in Prachinburi, at a cost of 12 billion baht. The new mill will increase Advance Agro’s capacity to one million tonnes a year. Construction was planned to start in 2007 and the plant is planned to start production in 2009. Half of the money is to come from capital funds and loans. The remainder coming from the company’s working capital. Finnish consulting firm Pöyry produced a feasibility study for the project.[224]

In May 2008, Pulp and Paper International reported that Advance Agro had decided to scale back its new paper mill from 420,000 tons a year to 220,000 tons a year.[225] According to a company statement on the Stock Exchange of Thailand website, the capacity of the new paper plant will be 200,000 tonnes a year. From 2010, the company plans to stop selling pulp and to use all pulp produced for its own paper production. The company plans to borrow 3 billion baht to finance the new paper mill. The total cost of the proposed plant is 6.6 billion baht.[226]

Advance Agro is also planning to build an ethanol biofuel plant in Prachinburi province. Construction is planned from March 2008 to June 2009.[227] The company has set up a company called Double A Ethanol Co., which is 99.99% owned by Advance Property Synergies Public Company Limited.[228]

Where the company will get its raw material from to feed these expansions is not clear. When asked, Thirawit Leetavorn, regional senior executive vice-president at Advance Agro, did not answer my questions about how the company plans to supply raw material to these new developments.[229]

One possible source of new raw material for Advance Agro could be from plantations in Laos and Cambodia, where Advance Agro is expanding its operations. However, little information seems to be available about these plans. Sayo AA, a subsidiary of Advance Agro, requested 200,000 hectares for tree plantations in Laos. According to a survey by the German Agency for Technical Cooperation (GTZ), provincial authorities offered 12,000 hectares. GTZ reports that in November 2005, Sayo AA transferred this land to Indian pulp giant Grasim, which is developing a plantation and pulp project in Laos.[230] Sayo AA has applied for permission to plant a further 10,000 hectares in Laos – the investment was authorised on 11 January 2007, although the land allocation has not yet been approved. In May 2007, Prime Minister Bouasone Bouphavanh announced that no more large-scale land concessions would be approved “on an indefinite basis, or until a more comprehensive strategy could be devised,” the Vientiane Times reported.[231] Meanwhile, Advance Agro trucks are reported to be carrying eucalyptus from Laos, presumably to feed Advance Agro’s pulp operations in eastern Thailand.

In the late 1980s, the province of Riau in central Sumatra was 80 per cent covered in forest. Today, only 30 per cent is left. “The main driver of deforestation and peat-bog draining here is the voracious appetite for timber, and the big players are two giant pulp mill owners”, reports Fred Pearce in New Scientist magazine. “One company is Asia Pacific Resources International (APRIL), part of RGM International, an empire owned by Singapore-based magnate Sukanto Tanoto. APRIL’s rival is the Sinar Mas Group dynasty founded by Eka Tjipta Widjaja, which owns Asia Paper and Pulp (APP).”[232]

APP boasts on its website that it is the largest pulp and paper producer in Asia outside Japan.[233] APP’s products include printing and writing papers, coated and uncoated sheets, photocopy paper, stationery, carbonless paper and tissue paper products.[234] Although APP doesn’t say this on its website, the company is also one of the most controversial and destructive pulp and paper companies on the planet.

Construction of APP’s Indah Kiat pulp mill started in 1994. At the time, it was the largest single-line pulp mill in the world. In the previously small village of Kerinci, four thousand Indonesians worked day and night to build the mill. The pulp mill was designed by the Finnish consulting firm Jaakko Pöyry. A soda boiler was supplied by Finland’s Tampella. More machinery came from Finland’s Kone, Valmet, Ahlstrom, Sunds Rauma and Outukumpu, Sweden’s Sunds Defibrator, Noss and Asea Brown Boveri Flakt; Japan’s Mitsubishi Heavy Industries and Nippon Sanso; Canada’s Chemetics and Bailey; the USA’s Cranston and Solarturbines; Germany’s Siemens and Voith; Britain’s ICI; Taiwan’s Teco; and India’s Ion Exchange.[235]

Today, APP’s Indah Kiat pulp mill has a capacity of 2 million tonnes a year. Indah Kiat also has a 1.5 million tonnes a year paper mill. Since starting operations in Sumatra in the 1980s, WWF estimates that APP has pulped about one million hectares of natural forest in Riau province.[236]

APP is ultimately owned by the Widjaja family, one of Indonesia’s largest business families, through a complex series of shareholdings.[237] The man who established the Sinar Mas Group, Eka Tjipta Widjaja, was the fifth richest business person in Indonesia in 2007, according to Forbes magazine.[238] Apart from pulp and paper the Sinar Mas Group is involved in agribusiness (including palm oil – another massively destructive plantation crop), property and finance. In 1990, Eka Tjipta Widjaja was reported as saying, “Once I decide to do something, I will pursue it at any cost.”[239] This could be APP’s motto.

Transfer pricing in Sinar Mas’s corporate maze

The Sinar Mas conglomerate includes hundreds of companies. The ultimate owners are in a position to run the various companies for their own interests and to capture profits for themselves. The losers in this arrangement are shareholders (when the price falls), creditors (when loans are not repaid)[240] and local people who are left to find new livelihoods after their environment is destroyed to make way for Sinar Mas’s monocultures.

The vast number of companies and the almost complete lack of transparency allows Sinar Mas to control of sales prices between companies in the group. Transactions between companies controlled by the Widjaja family include “wood supply, energy supply, chemicals supply, the marketing of pulp and paper products both to domestic and international markets, insurance, the construction of infrastructure, finance, etc.”[241] For example, APP’s Indah Kiat pulp mill has an agreement with the Arara Abadi plantation company. Both companies are part of the Widjaja family conglomerate. Under the agreement Indah Kiat finances the plantation company. Payments from Indah Kiat to Arara Abadi appear in financial reports as “non current advances to related parties”.[242] The agreement allows Arara Abadi to operate at very low costs (even lower if the loans from Indah Kiat are not repaid). The transactions between the companies are not transparent and profits generated by Arara Abadi are impossible to calculate accurately.[243]

In 2006, the Center for International Forestry Research (CIFOR) published a report looking at APP. They chose APP because the company highlights many of the problems in the pulp and paper sector in Indonesia: rapid expansion; massive deforestation; and huge debts.[244] The CIFOR report includes a matrix illustrating the links and transactions between the various companies controlled by the Widjaja family. The report points out that “The impressive list of these transactions tends to show that the ultimate owners made use of transfer pricing to move profits, as they have total power of decision.”[245] Transfer pricing is a mechanism whereby the price of a transaction between related companies is based on where company owners want profits to be realised. For example, a plantation company might sell wood fibre to a related pulp mill at a highly inflated cost, in order to transfer profits from the pulp mill (which may have, say, run up enormous debts which creditors are trying to reclaim by seizing the company’s profits) to the plantation company, which formally at least is a separate company. If the pulp mill meanwhile pours money in the form of interest-free loans into the plantation company this will also help hide the profits.

CIFOR’s researchers, Romain Pirard and Rofikoh Rokhim, note that the prices of wood supply to APP’s pulp mills increased in a “spectacular way” from 2001 onwards. APP explains that this is because the company is increasingly using plantation wood, which is more expensive than clearcutting natural forests. Pirard and Rokhim point out that the mills have transferred tens of millions of dollars to the wood suppliers in recent years and that a more convincing reason for the wood price hike is the fact that during the 1990s APP attracted investors by advertising the company’s access to very cheap raw materials from native forests. After 2001, the agreements were changed: presumably so that the profits were transferred from the pulp mills to the wood supplier companies. Although the wood supplier companies are also controlled by the Widjaja family, they do not owe vast amounts of money to international investors.[246]

The banks lending to the Widjaja family companies in the 1990s made little effort to investigate the nature of the companies they were investing in. “When we approved the credit for millions of US dollars, we just signed and never asked in detail about the risks of the business”, a former director of corporate finance of a major financial institute told CIFOR’s researchers in an off-the-record interview in 2004.[247]

The banks allowed APP to run up colossal debts, totalling an estimated US$13.9 billion. Even after the Asian economic crisis, investors remained optimistic. “Asia Pulp & Paper: Here Comes the Cash Flow!” exclaimed Morgan Stanley in November 1999.[248] When it became clear that APP was having difficulty repaying its debts, investors continued to pour money into Widjaja family companies, including in the pulp and paper sector, in the hope that some of the new debt would be used to repay existing debts.[249]

Part of APP’s expansion was financed by Bank Internasional Indonesia, which is also part of the Sinar Mas Group. In 1999, the bank ran into difficulties because of its non-performing loans. The amount of loans that the bank gave to related parties was higher than allowed under Indonesian law. The case was never brought to court and the Indonesian Bank Restructuring Agency (IBRA) took over the bank’s non-performing loans on behalf of the Government of Indonesia. IBRA ended up with US$1.3 billion of APP’s debts.[250] Ultimately, Indonesia’s taxpayers have ended up bailing out APP. In November 2001, the Widjaja family agreed with IBRA to give personal guarantees against APP and Sinar Mas debts. The following year, the IMF stepped in and, acting on behalf of international creditors, pressured IBRA to work on a restructuring involving all creditors at the same level. In the process, Widjaja’s personal guarantees of repaying IBRA debts disappeared.[251]

In March 2001, APP appointed Credit Suisse First Boston (Switzerland) to coordinate a restructuring of its debt.[258] A week later, APP defaulted on its loan repayments. APP’s debt was divided into three parts with separate restructuring deals:

Complex debt restructuring negotiations between APP and more than 200 creditors (mainly from the US, Europe and Japan) resulted in a debt restructuring package covering US$6.7 billion which was signed by 93 per cent of APP’s creditors in 2005. APP restarted interest payments in April 2005. But the “Master Restructuring Agreement” (MRA) was biased in favour of Widjaja, rather than the creditors. Debts were to be repaid over a period of more than 15 years. Interest that had already accrued was not included. Control of operations remained exactly as it was before the restructuring agreement. “In short,” conclude CIFOR’s researchers, “the MRA did not make a substantial modification to the core reasons why the group followed a rationale that already badly impacted on Indonesian natural forests, on Indonesian natural forests, on Indonesian taxpayers, and on investors from around the world.”[260]

Many bondholders (which included insurance companies, fund managers, pension funds and individual investors) sold their APP bonds, at a heavy loss, to “distressed debt funds”. These secretive funds buy up securities cheap, in the hope of large profits after the company restructures its debt.[261] Two of these distressed debt funds, Gramercy and Oaktree Capital Management went to court to attempt to be repaid in full. Gramercy and Oaktree Capital Management bought large numbers of APP bonds cheap and stand to win considerable profits if they win.[262] In April 2007, the New York State Supreme Court ordered APP to repay the creditors. Most of APP’s creditors oppose legal action against APP and its subsidiaries, because they know that the company simply cannot repay its debts and would go bankrupt if it were forced to do so. Even the repayment of US$335 million (which amount to less than 2.5 per cent of APP’s debt) to Gramercy and Oaktree Capital Management would leave APP’s subsidiaries in a weak financial position.[263] Gramercy and Oaktree are also seeking an order, through the courts of Singapore and New York, which would allow them to seize payments made by APP’s subsidiaries to their creditors.[264]

In September 2008, Reuters reported that APP said it had reached “full and final settlement” of all litigation and disputes outstanding with Oaktree Capital Management. No terms of the agreement were released.[265]

Expansion to China

Astonishingly, APP still manages to raise money on international credit markets. Some of the same financiers that invested in APP in Indonesia, have supported APP’s expansion to China. In 2004, when APP’s dismal financial status was well know, Germany’s Euler Hermes decided to provide export credit insurance for APP’s expansion in China, apparently having learned nothing from the company’s massive debt default and horrendous environmental track record.

Hermes defends its guarantees covering machine exports to APP with two main arguments. First it points out that other export credit agencies also supported APP’s expansion. This is the well-known “race to the bottom” argument, in which ECAs argue that if they did not support a project, another ECA would do so. The net effect would be jobs lost in the country whose ECA did not support the project and the project would go ahead anyway.[266] This may be true, but it does not mean that ECAs supporting a project can simply ignore the financial, environmental and social impacts directly caused by the company they are supporting.

Second, Hermes argues that most of the Hermes guarantees were for paper production, which would not in itself require more raw material as the pulp capacity was already in place. The argument is disingenuous since Hermes knows full well that some of the raw material feeding the pulp mill comes from APP’s destruction of the forests of Sumatra, at least part of which is illegal. Hermes also knows that the pulp and paper mill has polluted the Siak River destroying fisheries and leading to serious health problems for local communities. Hermes, however, denies such arguments, citing APP’s own data to prove its case.[267] [268]

Hermes did not talk to local people affected by the pollution from Indah Kiat. Hermes rejected a measurement of AOX based on a water sample taken by German film-maker Inge Altemeier as “not comprehensible” (“nicht nachvollziehbar”). Altemeier’s sample revealed an AOX value of 7.8 mg/l (the maximum allowed under German regulations is 0.1 mg/l). Regarding the supply of raw material to Indah Kiat, Hermes argues that Arara Abadi is certified to ISO 14001 and will attempt in the future to achieve Forest Stewardship Council certification. Hermes argues that claims of illegal logging against Arara Abadi could not be proven.[269]

In 2007, APP managed to get FSC Chain of Custody certification for part of its pulp mill operations. The audit was carried out by SGS-Qualifor’s Salahudin Yaacob, a Malaysia-based SGS executive. He told journalists writing in the Wall Street Journal, that his role was limited to checking that APP legally owned its almost 200,000 hectares of industrial tree plantations. The chain of custody certificate allowed APP to use its pulp mixed with fully FSC-certified pulp to manufacture paper that could be labelled with the FSC “mixed sources” logo.[270] Two months later, FSC issued a statement saying that it had “dissociated from working with Indonesian based Asia Pulp and Paper (APP) in October 2007”. FSC explained that “association with APP would threaten the good will and faith invested in the name Forest Stewardship Council and the years of support and participation by companies that are truly committed to the pursuit of responsible forest management globally”.[271] Setting aside, for the moment, the fact that FSC has certified several industrial tree plantation companies which are clearly not “committed to the pursuit of responsible forest management”, FSC’s statement makes nonsense of Hermes’ arguments justifying its decision to support APP. Unfortunately, the damage is already done.

APP China’s debt of about US$2.8 billion was restructured in November 2003. The debt-for-shares deal left Chinese state-owned banks as co-owners of APP China, but the largest shareholding is the Widjaja family, which had been buying up APP China bonds at a discount before the restructuring. APP owns only 0.1% of APP China meaning that APP China’s operations are out of reach of APP’s creditors. But APP China, APP and Sinar Mas are all still firmly under the control of the Widjaja family.[272]

APP China is expanding rapidly. The company’s projects in China include Gold East Paper Co. Ltd in Jiangsu, on the Yangtze River. By 2005, APP had invested US$1,823 million in its three paper machines at Gold East Paper.[273]

Another APP China project is Hainan Jinhai Pulp and Paper, the world’s largest single line pulp production facility. Pulp production started in November 2004. The mill produces 3,200 metric tonnes per day. Raw material comes from APP’s eucalyptus and acacia plantations, but the company is also buying wood chips, because the plantations are not sufficient to supply the mill. About 23 per cent of the mill’s wood is bought. 80 per cent of the pulp is sold to other APP mills, with the rest sold on the market.[274]

Yet another APP China project is Ningbo Asia Pulp and Paper, which produces paperboard. The mill runs on a mixture of recycled paper and virgin pulp.[275]

What was the money for?

One of the extraordinary aspects of the APP story is that the company managed to run up debts of US$13.9 billion. After all, the company only runs a handful of pulp and paper mills and related forestry operations. Until 2001, it made large profits – CIFOR’s researchers estimate profits of US$1.5 billion for the four main APP companies between 1993 and 1999. Yet by April 2001 according to APP, APP’s flagship pulp mill, Indah Kiat, had run up a debt of US$2.7 billion.[276]

Why did the banks never ask what all that money was actually for? Indah Kiat managed to arrange loans to refinance loans that it had failed to repay. When it failed to repay the new loan the company arranged yet another loan.[277] The Widjaja family has managed to pocket the profits, delay paying its debts, avoided repossession of its assets, avoided any meaningful restructuring of its corporate empire and, so far at least, Widjaja family members have avoided going to jail.

CIFOR’s researchers point out that APP’s financial collapse had little to do with the Asian economic crisis, which happened four years before APP defaulted on its debts. When the exchange rate of the rupiah collapsed against the dollar, this was to some extent to APP’s advantage – production costs were in rupiah and export oriented sales were mainly in dollars. CIFOR’s report explains that the losses were related

“to the global oversupply of pulp and paper products on the international market, an increase in production costs (for unclear reasons), losses due to foreign exchange rates (registered in the financial reports but not always realized), and other unspecified reasons (the financial reports specify ‘other costs’ without being any more precise).”[278]

Environmental destruction and violence

The worst aspect of APP’s operations, however, is not the fact that the company has managed to obtain large amounts of money which it will not, and probably cannot, repay. The company has devastated the environment and livelihoods of thousands of people in Sumatra.

When Nordea provided a loan to Arara Abadi, APP’s plantation company, the bank provided no environmental or social demands on the company as part of the deal.[279] It would be unfair, however, to single out Nordea. The bank is just one of APP’s many financiers that failed to carry out adequate due diligence before giving loans to APP. Having handed over the cash, none of the banks has made serious attempts to limit the social and environmental damage carried out by APP or its subsidiaries.

Large areas of Indah Kiat’s concessions in Riau are on the land of the indigenous Sakai people, who were evicted to make way for the pulpwood operations.[280] In 2001, villagers won the land rights to 70,000 hectares of APP’s concession. APP lost one quarter of its concession area. A report produced in 2001 by consulting firm AMEC notes that “The existing level of claim disputes can have a large impact on sustainable wood supply plans. If the number of successful claims escalates, it will have a further severe impact”.[281]

Indah Kiat faces a series of land claims and land conflicts. According to AMEC’s 2001 report, the company does not control large parts of its concession area and has underestimated the extent of potential land claims and conflicts.[282] Arara Abadi employs its own private security guards. A 2003 report by Human Rights Watch documents violence carried out against villagers.[283] For example, when Arara Abadi started to acquire land near the village of Mandiangin in the 1980s, it simply seized land from the indigenous Sakai and Malay people without compensation. Armed police and military officials took part in meetings between the company and villagers. One villager told Human Rights Watch, “We often heard about people being arrested or just disappearing. So when they came here wearing their guns, we just kept our mouths shut.”[284]

In February 2001, 700 Arara Abadi employees supported by paramilitary and police forces attacked villagers in Betung. Homes were destroyed and 58 villagers arrested. Five villagers were injured, two of them seriously.[285] There are numerous similar examples. Villagers in Suluk Bongkal have been trying to establish their right to 2,900 hectares of land since 1997. But even with written proof of their tenure rights dating back to 1940, they have been unable to convince the authorities and APP of their land rights. Villagers complain that every time they have come to an agreement with Arara Abadi, the company has violated the agreement.

In each case, rather than attempting to resolve the conflicts, Indah Kiat denies allegations of violence.

“Every step in this chain is illegal”

In 2007, police in Sumatra clamped down on illegal logging, stopping the supply of illegal logs to pulp mills. The Indonesia Pulp and Paper Association threatened that pulp production may be forced to decrease by as much as 75 per cent as a result.[286] This figure gives some idea of how important illegal logging is to the supply of raw material to pulp mills in Sumatra. As it was, the police clampdown was lifted, and business as usual was allowed to resume.

After APP appropriated villagers’ land for plantations, villagers’ livelihoods were destroyed. One of the few opportunities they have to earn income is through selling timber to the company. In some cases, villagers log in areas that the company has set aside for conservation. While the company turns a blind eye to the fact that the timber it is buying from villagers is illegally logged, this puts villagers in direct conflict with conservation organisations.

The Swedish NGO, Swedwatch, describes the process by which illegal timber becomes legal. Villagers transport the logs to the local town and contact a broker of illegal timber. The broker supplies documents that certify that the timber is from an area with a permit to be logged and is legal. The broker pays the villagers and transports the timber to the pulp mill. The pulp mill pays the owner of the logging permit, who then pays the broker for his services.[287]

In 2001, John Aglionby, a Guardian journalist, reported on illegal logging to supply Indah Kiat. He describes an illegal logging team’s work cutting an area of forest. “Every step in this chain is illegal,” he reported.

“The loggers have no permits to destroy the rainforest and take the wood to Perawang, a small town half-way up Sumatra. [The loggers] have no right to buy it and sell it on to the pulp factory, for whom it is a serious offence to buy illegally felled timber.”[288]

The pulp mill in Perawang that Aglionby refers to is APP’s Indah Kiat mill. The logging team are villagers whose previously earned their living fishing in the Siak River. “Now there are no fish left,” one of them told Aglionby. “They have all been poisoned by the factory, so chopping down the forest is the only way we can make money.”[289]

“What shall we do?” one of the villagers now involved in illegal logging asked Swedwatch’s researchers. “There is nothing left for us to live on, they have taken our land, killed the fish and we would die if they stopped buying the wood from us. Indah Kiat has to buy! It is because of them that we lack possibilities to support ourselves.”[290]

In 2006, WWF reported that APP used timber from Libo forest for its pulp mills in Riau. Libo forest is part of the Balai Raja Wildlife Sanctuary, one of the few remaining habitats of the Sumatran elephant. Balia Raja contained about 39,000 acres of forest when it was declared a Wildlife Sanctuary in 1986. By 2006, only 650 acres remained.[291]

APP is fully aware that it is buying illegally logged timber. In 2004, Anil Raina, from the corporate marketing department of Sinar Mas, told Swedwatch’s researchers that “If illegal logging is stopped it will be a hard blow against the local communities, however, since some of them may depend on this activity. Until we find some way to provide either some jobs or support for villagers, so they can survive, we will not enforce a total ban on logging.”[292]

APP’s forestry operations in Riau were halted in 2006 as a result of a police investigation into illegal logging. While the investigation is long overdue, APP simply expanded its logging operations in Jambi province, cutting 50,000 hectares of Bukit Tigapuluh Forest. WWF Indonesia notes that “some of the clearing seems to be in violation of Indonesian law”. Part of the area cleared is a proposed Specific Protected Area. The forest is habitat to Sumatran orangutans, tigers and elephants. The forest is also home to two tribes of Indigenous Peoples, one of which is found nowhere else in Sumatra. APP has plans to build a new road through the Bukit Tigapuluh Forest, to facilitate transport of timber to its pulp mills.[293]

Pollution and pulp production

As well as destroying forests, APP has polluted the Siak River. Indah Kiat started its first pulp mill at Perawang in 1984, with an outdated factory imported from Taiwan. The 100,000 tonnes a year pulp mill used elemental chlorine and wastes were discharged into the Siak River. Protests from local villagers led to an agreement in 1992, mediated by Indonesia’s Environmental Impact Management Agency, BAPEDAL, under which Indah Kiat agreed to meet the villagers’ demands. The company, however, failed to do so. Indah Kiat’s pulp and paper mills have expanded to cover an area of 400 hectares and now use a mixture of chlorine and elemental chlorine free bleaching.[294]

Six years ago, German film-maker Inge Altermeier visited Indah Kiat to produce a film about the impacts of pulp production on local communities. She found and filmed an illegal outlet from Indah Kiat’s mill, which the company used at night. During the day the output was not in use, but the air stank and dead fish floated in the river.

In a village near Indah Kiat’s mill, people complained about the bad smell and told the film-maker that they were suffering from itching, headaches and vomiting. A villager called Tasjudin showed Altemeier his garden. Since Indah Kiat arrived, there are no more coconuts on his trees. The fruit on his trees is covered in black spots and it rots before it ripens. “Indah Kiat is ruining our lives. But what am I to do? This is my home, I have to live here,” Tasjudin said.

Before Indah Kiat built its pulp mill, people could fish in the Siak River. They used the river for drinking water and for bathing in. Since villagers can no longer drink from the river, they demanded that Indah Kiat provide them with clean water. The company gave them a water pump. But villagers found that the ground water was also polluted and smelled bad. Villagers are forced to buy bottled water to drink. Many still wash in the river because there is not enough pumped water especially in the dry season.[295]

In 2005, Rully Syumanda, Forest Campaigner with WALHI, and Rivani Noor, from the Community Alliance for Pulp Paper Advocacy, interviewed people in villages near to Indah Kiat’s mill in Perawang. They also spoke to people living in Perawang. Villagers told them their vegetables, chillies and flowers did not grow normally, especially in the dry season. During the rainy season, a many of the villagers’ hens and ducks die. They told the researchers they were sure that the cause was the smoke containing harmful chemicals from Indah Kiat’s mill.

From 1987 to 1996, the air smelled very bad, villagers said. It has improved since Indah Kiat installed a filtering system on factory chimneys. But the air is still polluted and still causes respiratory problems, especially for visitors.

Villagers told Syumanda and Noor that before the mill started operations, fishers could catch 40 to 50 kilogrammes of fish a day in the Siak River. Today, they are lucky to catch four or five kilogrammes. Sometimes, they said, the river smells really bad and they cannot catch anything. Every month, the river gives off a bad smell for a week.[296]

APP’s monoculture tree plantations

APP’s Indah Kiat pulp mill gets its raw material mainly from Arara Abadi, which is, as mentioned above, also part of the Sinar Mas Group. Arara Abadi has a concession area of just under 300,000 hectares. About 60 per cent of this area was previously covered with forest. By 2003, about 228,000 hectares had been planted with Acacia mangium.

Despite the impact of APP’s operations in Sumatra, the company continues to receive support from professional foresters. In 2000, an Australian forester called Stephen Midgley visited Sumatra to look at “some commercial forest plantations”, as he calls Arara Abadi’s industrial monocultures. At the time of his visit to Sumatra, Midgley was Portfolio Manager, Tree Improvement and Genetic Resources Program at the Commonwealth CSIRO. A photograph accompanying his article in the Australian Tree Resources News (published by CSIRO) shows an aerial view of the plantations. The monoculture stretches to the horizon. Midgley’s report of his visit to Sumatra makes no mention of the forests cleared to make way for these plantations. Neither does he mention the impact of the forest clearance and plantations on local people’s livelihoods. Midgley wasn’t in Sumatra to look at forests or talk to people affected. Instead he was interested in one tree species only: Acacia crassicarpa. Arara Abadi has planted about 40,000 hectares with this species.[297]

Midgley calculates that Arara Abadi’s 40,000 hectares of Acacia crassicarpa represented an asset worth more than US$1 billion, based on the current world price for kraft pulp. Midgley claims that the plantations are “offering opportunities for employment and economic development for many Indonesians, and industrial opportunities for larger companies”.[298] Six months after Midgley’s visit, APP defaulted on its debts. The “economic development” that Midgley described was little more than a sham.

The company frequently overstates the growth rate of its plantations. According to Arara Abadi’s Research and Development Unit the plantations have an annual growth rate of 30-35 cubic metres per hectare. The target is 45 cubic metres per hectare. CIFOR points out that these figures come from experimental areas and not from the company’s actual tree plantations.[299] A 2001 report by consulting firm AMEC found that average annual growth rates were 28 cubic metres per hectare on mineral soils and 23 cubic metres per hectare on peat soils. About 70 per cent of APP’s plantations are on peat soils.[300] In its 2004 Sustainability Action Plan, APP revised its annual growth rates downward to 23.2 cubic metres per hectare on mineral soils and 19.6 cubic metres per hectare on peat soils.[301]

By 2001, according to AMEC, Arara Abadi, had converted about 217,000 hectares to industrial tree plantations. Of this, about half was forested, although AMEC acknowledges that this is little more than a guess.[302] Arara Abadi also has licenses to log a further 290,000 hectares of forest and convert it to plantations up to 2011.[303] AMEC blandly states that “there will need to be careful consideration of the international market acceptability” of clearcutting this forest and replacing it with monoculture tree plantations.

“Several billion tonnes of carbon”

Arara Abadi has caused irreparable damage to large areas of Riau’s swamp forest by cutting canals and draining the swamp. The Kampar peninsula is the latest target to meet APP’s voracious appetite for timber. Covered in 400,000 hectares of peat swamp forest, the Kampar peninsula is the world’s second largest tropical peat swamp. It is an important habitat for the Sumatran tiger.[304] In 2004, WWF estimated the population of Sumatran tigers at less than 500.[305] Three years ago, APP announced its plans to clearcut 180,000 hectares of forest on peatlands.[306]

“Until five years ago,” reports Fred Pearce in New Scientist, “Kampar was a true bog with water at the surface, and it was covered by a rich rainforest in which Sumatran tigers roamed. A huge dome of peat, up to 15 metres deep, had built up over the past 6000 years as woody debris fell into the swamp. It contains several billion tonnes of carbon.”[307]

A recent study by WWF, Remote Sensing Solution GmbH and Hokkaido University found that the forest destruction in Riau province for conversion to oil palm and pulpwood plantations generates more annual greenhouse gas emissions than the total emissions in the Netherlands. Riau’s peatlands probably hold South-east Asia’s largest store of carbon. WWF notes that “[Riau] also has Indonesia’s highest deforestation rate, substantially driven by the operations of global paper giants Asia Pulp & Paper (APP) and Asia Pacific Resources International Holdings Limited (APRIL).”[308]

WWF’s report found that more than four million hectares of forest has been destroyed in Riau province in the last 25 years.[309] Driving this destruction are two plantation industries: oil palm and pulpwood. Indah Kiat alone requires 9.8 million cubic metres of wood a year, to keep its two million tonnes pulp mill operating. In 2004, according to CIFOR’s Chris Barr, APP’s plantations supplied only between 50 and 60 per cent of Indah Kiat’s raw material needs.[310]

APP frequently puts out statements claiming that its operations are harmless: “APP is committed to purchasing wood fiber for its pulp- making operations from sustainably-managed forestry sources, which conserve areas of outstanding habitat and which operate in harmony with local communities.”[311]

WWF Indonesia attempted to work with APP to ensure that the company surveyed their concessions for High Conservation Value Forests. But after WWF Indonesia had signed an agreement with the company, APP’s Anil Raina told researchers from Swedwatch that preserving High Value Conservation Forests in APP’s concessions would be difficult. “There is a limit to how much we can conserve”, he said. “Then we would need alternative sources!”[312]

APP produced a Sustainability Action Plan, which “shows that APP has integrated some of WWF’s demands but disappointingly has not addressed some of the conservation organisation’s basic concerns,” notes WWF Indonesia. Among the issues not addressed was protection of forests with high conservation value. By mid-2004, the WWF-APP agreement had unravelled and WWF wrote to APP’s major buyers in Asia, the US and Europe asking them to “immediately review their relationships” with APP.[313]

Several companies have stopped buying paper from APP, including Woolworths in Australia[314] and Staples and Office Depot in the US. When Staples stopped buying paper from APP in February 2008, Staples’ Vice President for Environmental Issues Mark Buckley told the Wall Street Journal that a decision to continue selling APP products would be “at great peril to our brand.”[315]

Botnia, Uruguay: Monocultures, pollution fears and an international dispute

The US$1.2 billion Botnia pulp mill is the largest single foreign investment in Uruguay’s history.[316] Built on the Uruguay River at Fray Bentos, the plans for the pulp mill led to massive protests in Argentina and Uruguay. Spanish company ENCE also planned to build a pulp mill near Fray Bentos, but relocated its pulp mill to Colonia in the south-west of Uruguay, as a result of the protests.[317]

The Argentinian government was so concerned about pollution from the mill that it took Uruguay to the International Court of Justice (ICJ) in the Hague. In July 2006, the ICJ ruled against Argentina. But this first ruling only stated that the court could not order a halt to construction of the pulp mills because there was no immediate danger. In other words, any pollution would happen once the pulp mill starts operations and the court cannot rule on something that has not yet happened.[318] It will take the ICJ several years to reach a decision about whether the construction of the pulp mill violates the 1975 Uruguay River Treaty. Under the treaty, either country has to inform the other about any developments which might have an impact on the river, before the project starts. In the case of the Botnia pulp mill, Uruguay did not do so, claims Argentina.

The pollution from the pulp mill has received much attention internationally. Less discussed is the fact that the pulp mill sources its raw material from thousands of hectares of eucalyptus plantations, which are drying up streams and leaving communities without water supplies.

Botnia is a Finnish company, owned by the Metsäliitto Group (a cooperative of Finnish forest owners, 53 per cent) and UPM Kymmene (47 per cent).[319] Despite the controversy, the pulp mill received a series of subsidies from European bilateral institutions as well as from the World Bank. In November 2006, the International Finance Corporation agreed to finance the project, giving a green light to other financiers to get involved.

Lavish international subsidies

Financing for Botnia’s pulp mill comes from the following sources of public money:

US$170 million from the International Finance Corporation;

US$350 million guarantee from the Multilateral Investment Guarantee Agency;

US$100 million reinsurance from Finnvera of MIGA’s guarantee;

USS$70 million from the Nordic Investment Bank;

US$230 million buyer credit guarantee from Finnvera;

US$7 million from Finnfund to Botnia’s plantation subsidiary Forestal Oriental.

When IFC announced its support for the pulp mill, Erkki Varis, Botnia’s CEO and President, wrote that

“the exhaustive studies have clearly endorsed the benefits the mill will bring. We hope that today’s decision can contribute to convincing the various stakeholders that the mill will comply with relevant environmental standards and not compromise the wellbeing of the inhabitants in the area.”[320]

But research by World Rainforest Movement in the areas of Botnia’s industrial eucalyptus monocultures shows that IFC’s studies were far from “exhaustive”. Instead they played down the problems and most importantly, failed to take into account the views of local people living near the plantations.

One of the IFC’s own reports illustrates problems. In April 2006, IFC hired Hatfield Consultants, a Canadian firm, to review Botnia’s (and Ence’s) environmental impact assessments. Hatfield’s report, written by Wayne Dwernychuk and Neil McCubbin, was critical of the assessments (which had already been accepted by the Uruguayan government). For example, Dwernychuk and McCubbin point out that in the previous assessments, “The reference to dioxins/furans in mill discharges appears to be handled in a rather cavalier manner.” Dwernychuk and McCubbin noted that “These compounds are of significant concern to the general public, and should be discussed fully. Setting the issue aside by concluding that dioxins/furans will be at ‘undetectable levels’ is unacceptable.”[321]

Nevertheless, the IFC reported on its website that “Studies by independent university and international research centers have shown that wastewater from ECF bleaching is virtually free of toxic chlorinated compounds such as dioxin.”[322] IFC fails to explain what the phrase “virtually free” means in the context of dioxins, how this differs from “undetectable levels”, or even whether this poses a risk.

Botnia is well aware of the risks of pollution from pulp mills. In 2003, a UPM pulp mill in Finland spilled 7,500 litres of black liquor into Lake Saimaa. A town called Bay of Hauki (named after a fish) is now known as “Pulp” because of the smell from the nearby pulp mill.[323]

Once the IFC loan was in place, other financiers jumped on board – without carrying out their own studies of the project. MIGA’s guarantee covers the investments for a period of up to 15 years, “against the risks of expropriation, war and civil disturbance, and breach of contract.”[324]

In April 2007, the Nordic Investment Bank (NIB) signed an agreement with the government of Uruguay to allow NIB to grant a loan to Botnia for its pulp mill. The agreement includes tax exemption to NIB and its debtors in Uruguay. It also provides legal and administrative immunity for representatives of NIB.[325]

Finnvera is Finland’s official export credit agency and is 100 per cent state-owned. In March 2007, Finnvera and Botnia signed a Buyer Credit Guarantee agreement of US$230 million. The guarantee is insurance for a 10-year export credit issued to Botnia – if the guarantee were to be called, the beneficiaries would be the commercial banks that financed the export credit. The export credit was used to buy equipment from Andritz Oy.[326]

Finnfund describes itself as “a Finnish development finance company that provides long-term risk capital for private projects in developing countries.”[327] Its majority shareholder is the Finnish state (79.9 per cent directly and 20 per cent through Finnvera; the remaining 0.1 per cent is owned by the Confederation of Finnish Industries). In 2004, Finnfund gave a loan of US$7 million to the Forestal Oriental (FOSA) plantation company whose majority shareholders are Botnia and UPM.[328]

In addition to this public finance, two private banks, Nordea and Calyon, are involved in financing the Botnia project. Nordea Bank is the mandated lead arranger for the project – which means that it is organising syndicated loans from a series of private banks. Nordea is the largest financial group in the Nordic countries. Calyon is the corporate and investment banking arm of the French Crédit Agricole Group. The crucial role of the IFC in assessing this project can be seen from an article in the Financial Times quoting a source at Calyon as saying that Calyon would pull out of the project if the IFC’s EIA proved to be negative.[329]

In April 2006, another private bank, the ING Bank, pulled out of the Botnia project. ING Bank was acting as advisor to Botnia and was working to arrange a US$480 million loan package. Before announcing the pull out, ING had been subject to sustained pressure from NGOs, who argued that supporting the mills was in conflict with the bank’s commitment to invest responsibly,[330] although a letter from ING Bank to Argentinian NGO CEDHA said that the decision to pull out was “not based on the assessment of the project’s compliance with Equator Principles”.[331]

“ING didn’t like the negative publicity around this project and nobody likes it,” Ville Jaakonsalo, Botnia’s finance director told the Financial Times. “It’s important for the banks that are involved that they know the industry and can differentiate facts from the nonsense and outright lies used by some of the opponents in this case. Perhaps ING weren’t able to do that.”[332]

After ING Bank pulled out and Botnia hired Calyon, the protests moved to Calyon. In May 2006 nine NGOs complained to Calyon that its involvement in the Botnia pulp mill was in breach of the Equator Principles.[333]

CEDHA has also filed complaints with the OECD against Finnvera[334] and Nordea,[335] claiming that the Finnish export credit agency and the bank failed to comply with the OECD Guidelines for Multinational Enterprises in its support of Botnia.

Decades of subsidies

The international support for the pulp industry in Uruguay is not a one-off case of helping to cover a private company’s risks with public money. For more than 50 years, plantation proponents have helped to build the political and physical infrastructure to enable the development of large scale industrial tree plantations in Uruguay.

In 1951, a joint FAO and World Bank mission made a series of recommendations for the development of forestry in Uruguay. Among the recommendations was the promotion of suitable species for the timber industry. In 1985, the Japanese International Cooperation Agency funded a study of the feasibility of building a chemical pulp mill in Uruguay. JICA produced a “Master plan study for the establishment of tree plantations and use of planted wood in the Oriental Republic of Uruguay”, which promoted the establishment of pine and eucalyptus plantations. The 1988 Uruguayan National Forestry Plan is based on the JICA master plan.

In 1989, the World Bank provided a forestry loan to Uruguay, which enabled a series of benefits to the industry, including: “tax exemptions, partial refund of plantation costs, long-term soft loans, duty cuts on the import of machinery and vehicles, construction of roads and bridges, equal benefits for foreign investors.”[336]

By 2000, the Uruguayan government had provided more than US$400 million in subsidies to the plantations industry, through direct subsidies, tax breaks, cheap loans and investments in infrastructure.[337]

Monocultures and water shortages

Botnia and its subsidiaries in Uruguay now own over 180,000 hectares of land, of which almost 100,000 hectares is to be planted with monoculture eucalyptus plantations. The plantations have caused serious problems for communities in rural Uruguay.[338]

Botnia, of course, denies the impacts and issues statements such as this:

“All of Forestal Oriental’s plantations have received FSC certification
There are no rain forests in Uruguay
Only planted eucalyptus is used for pulp production”[339]

What Botnia does not mention is that the consultants responsible for the IFC studies and the FSC assessment (carried out by SGS Qualifor) failed to listen to what rural people are saying about the plantations. In its EIA, Botnia didn’t even look at the plantations. IFC’s Cumulative Impact Study notes that: “The EIA Study prepared by Botnia did not address specific impacts relating to plantations.”[340] While IFC noted this omission, it did nothing to remedy it.

IFC’s consultants point out that Forestal Oriental knows that its fast growing tree plantations have an impact on stream flows. In 2000, Forestal Oriental hired a South African consulting firm, CSIR Division of Water in South Africa, which found that Forestal Oriental’s eucalyptus plantations resulted in reduced stream flows by an average of around 25 per cent. Nevertheless, the study concluded that as long as the plantations did not cover too large an area in a given watershed the impact should not be a problem. Whether CSIR spoke to any local people about the problems is not documented in IFC’s Plantations Annex. IFC’s consultants make no mention of any discussions with local people.[341]

While FSC certification should include taking local people’s problems into consideration, SGS failed to do so. Even when its assessors talked to local people SGS avoided dealing with what they told them. One villager told SGS that “the eucalyptus plantations consume a lot of water that in the long term can affect neighbouring populations.” SGS’s response was to explain that “The area is subject to prolonged droughts affecting the water table,” and that Forestal Oriental is carrying out a study into the impacts of plantations on water.

In April 2006, World Rainforest Movement published a study written by Ricardo Carrere. The study is based on a visit to the plantation areas by a team of WRM researchers and interviews with the people living there.[342]

Residents of Algorta (Río Negro), told WRM’s researchers that “because of the eucalyptus trees the Arroyo Negro stream dried up, it used to be the town beach.” Forestal Oriental, Botnia’s plantations company, owns plantations in this area.

A farmer in Guichón whose land is now surrounded by plantations owned by Forestal Oriental, complained that as a result of the plantations the Boyado stream, which runs though his farm, has completely dried up.

SGS’s public summary of their assessment of Forestal Oriental’s plantations fails to deal with the impacts of converting grasslands to industrial tree plantations, stating instead that “Natural forests are not converted to plantations.” Carrere notes that “The certifiers appear to be totally uninterested in the fact that . . . grassland areas would lose their original characteristics.”

One of the problems associated with the plantations in Uruguay is an increase in wild boars, foxes and venomous snakes. For sheep farmers this is a serious problem. The snakes have also killed pigs, calves, cows and even horses.

WRM spoke to two ex-workers of Forestal Oriental who had developed allergic skin reactions to the chemicals they were employed to spray on the plantations. A current worker said that Forestal Oriental gave workers protective equipment, but most workers did not use it because it was uncomfortable. “With this heat, you try working with gloves on!” he said.

WRM’s report notes that Forestal Oriental is among the most highly regarded employers in the plantation sector in Uruguay. But this is a result of government legislation, not FSC certification. Several people pointed out that working conditions had improved because the Ministry of Labour was monitoring compliance with labour legislation much more closely under the new government that came into power in March 2005. They commented that since 2005 workers could form unions whereas “before they weren’t allowed to form unions”.

WRM’s researchers visited an area called Paraje Pence in the department of Soriano to investigate the impact of the plantations on water supply. “All the people here have been left with no water,” one of the local men told them. “I have a little bit but the well is dirty. Close to here where my father lives there’s no water at all.”

Another villager told WRM, “I’ve lived here my whole life, and we never had any problems with water until they established all these plantations around eight years ago. Now we depend on the local government to bring us water.”

A local nurse explained how the lack of water has serious health impacts:

“The thing is that here, aside from the fact that people have been left without water in their wells, all of the freshwater ponds have disappeared too. So sometimes, when people have no water to wash their kids before bringing them to see the doctor, they just don’t bring them. There’s a girl who’s had lots of operations, and is still really weak. Last week she was supposed to come and see the doctor, but because the local authorities hadn’t delivered water for two weeks, she didn’t even have enough to wash her hands, so she didn’t come.”

FSC responded to WRM’s report not by investigating these problems, but by asking for a response from the certifying organisation, SGS. Under the FSC system, SGS is paid by the company it is certifying, in this case Forestal Oriental. Clearly it is not in SGS’s interest to delve too deeply into any of these issues.

SGS’s response to FSC is not available to the public, but it was apparently enough to reassure FSC. “FSC guarantees peace of mind to consumers” was the headline of FSC’s press release.[343] While this may or may not be enough for consumers, it is little consolation to the people living near the plantations in Uruguay.

The chairman of the town council of Guichón reflects the local perception of the way Forestal Oriental and other plantation companies address environmental problems. “To get this famous certification, the companies leave a pond and three ducks and then claim that they’re protecting the environment,” he said.

More subsidies through carbon trading

Botnia has received approval under the Kyoto Protocol’s Clean Development Mechanism to further subsidise its operations in Uruguay through carbon trading.[344] The company argues that by generating electricity through burning black liquor from the pulping process it will be able to sell 32 MW of electricity to the state electricity utility, UTE. Botnia argues that this will replace electricity generated from fossil fuel and therefore “the release of greenhouse gases . . . will be reduced.” Botnia does not explain how it knows that UTE will not use wind or solar energy in the future. In addition, even assuming some greenhouse gas emissions would be saved, by trading the carbon credits, Botnia ensures that the emissions will be released somewhere else. Further, the company fails to take into account the greenhouse gas emissions associated with its operations: carbon loss from soils, building the pulp mill, fuel consumption by forest machinery, logging trucks, and shipping the pulp to China once it has been produced.[345] Pöyry won the contract from Botnia to produce the CDM project documents, to carry out “stakeholder consultation” in Latin America and to make the arrangements for validation and registration of the project.[346]

The millions of dollars of “aid” and subsidies to the Botnia pulp mill are benefiting a series of Finnish companies including Botnia, Andritz Oy, Pöyry and Kemira. The pulp produced at the mill will be exported, along with the profits. The pulp will be shipped to UPM’s Changshu paper mill in China. The impacts of the industrial tree plantations, like the pollution from the pulp mill, are left in Uruguay.

Botnia’s Managing Director in Uruguay, Ronald M. Beare, says that “Botnia is a great opportunity, both for Uruguay and for the wider region.”[347] But many in Uruguay and Argentina disagree with this assessment. The Uruguayan writer, Eduardo Galeano, describes the development of the pulp industry in Uruguay as being “in the purest Colonial tradition: vast artificial plantations that they call forests, converted into pulp in an industrial process that dumps chemical waste into rivers and makes the air impossible to breathe.”[348]

[173] Julian Evans (1999) “Sustainability of Forest Plantations: The evidence. A review of evidence concerning the narrow-sense sustainability of planted forests”, Department for International Development, May 1999.

[205] A convertible bond is a long-term debt instrument which companies use to obtain funds. The company owes the bond holders a debt and has to pay the principal and interest at a later date, termed the maturity. The bonds can be converted to shares of stock in the issuing company.

[268] In 2006, I took part in a meeting with Ute Heinbruch who is in charge of overseeing Export Credit Guarantees/Guarantees for Direct Investments Abroad at the German Ministry for Economic Development and Cooperation (BMZ). See Chris Lang (2006) “APP is destroying forests”, Pulp Inc., 18 October 2006.

[281] Christopher Barr (2004) “Risk Analysis and Impact Assessment for Pulp and Plantation Investments: The Case of Indonesia”, presentation at International Forum on Finance and Investment in China’s Forestry Sector, Center for International Forestry Research (CIFOR), Beijing, 22-23 September 2004.

[297] Stephen Midgley (2000) “Acacia crassicarpa: a tree in the domestication fast lane”, Australian Tree Research News, Forestry and Forest Products, CSIRO, Number 6, October 2000.
Midgley has now set up a consulting firm called Salwood, which recently won a contract with Stora Enso in Laos. Stora Enso aims to plant an area of 35,000 hectares with eucalyptus to feed its operations in China.

[298] Stephen Midgley (2000) “Acacia crassicarpa: a tree in the domestication fast lane”, Australian Tree Research News, Forestry and Forest Products, CSIRO, Number 6, October 2000.

[300] Christopher Barr (2004) “Risk Analysis and Impact Assessment for Pulp and Plantation Investments: The Case of Indonesia”, presentation at International Forum on Finance and Investment in China’s Forestry Sector, Center for International Forestry Research (CIFOR), Beijing, 22-23 September 2004.

[310] Christopher Barr (2004) “Risk Analysis and Impact Assessment for Pulp and Plantation Investments: The Case of Indonesia”, presentation at International Forum on Finance and Investment in China’s Forestry Sector, Center for International Forestry Research (CIFOR), Beijing, 22-23 September 2004.

[311] “APP Refutes Allegations by Eyes on the Forest”, APP Official Statement, 5 July 2007.